-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O7lXyfq91XdX3WP0fsYT5DfBt6nlUxX5OXza/jMiqrrDRuBI8F29HbVyXfdBZ8hv Kkpp9ReTkkw+qqw471t8pw== 0000950134-96-005211.txt : 19961004 0000950134-96-005211.hdr.sgml : 19961004 ACCESSION NUMBER: 0000950134-96-005211 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19961003 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: THOMAS GROUP INC CENTRAL INDEX KEY: 0000900017 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 720843450 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22010 FILM NUMBER: 96638914 BUSINESS ADDRESS: STREET 1: 5215 N OCONNOR BLVD SUITE 2500 CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 2148693400 MAIL ADDRESS: STREET 1: 5215 N OCONNOR SUITE 2500 CITY: IRVING STATE: TX ZIP: 75039 10-K/A 1 AMENDMENT NO.1 TO FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A No. 1 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] FOR THE YEAR ENDED DECEMBER 31, 1995. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] FOR THE TRANSITION PERIOD FROM ______ TO ______. Commission file number 0-22010 THOMAS GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 72-0843540 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5215 NORTH O'CONNOR BOULEVARD, SUITE 2500, IRVING, TEXAS 75039-3714 (Address of principal executive offices) (Zip Code) (214) 869-3400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.01 per share NASDAQ-NMS
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes / No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 29, 1996, the aggregate market value of the voting stock held by non-affiliates of the registrant was $35,294,000, based on the NASDAQ-NMS closing price. 2 As of February 29, 1996, the following number of shares of the registrant's stock were outstanding: Common Stock 5,898,907 Class B Common Stock 152,583 --------- Total 6,051,490 ========= DOCUMENTS INCORPORATED BY REFERENCE. Portions of the 1995 Annual Report to Stockholders are incorporated by reference into Part II. Portions of the definitive Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference into Part III. 2 3 PART II Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company derives its revenues from monthly fixed and incentive (performance-oriented) fees for the implementation of Total Cycle Time and other business improvement programs. Performance-oriented fees are tied to improvements in a variety of client performance measures typically involving response time, asset utilization, productivity, and profitability.
- -------------------------------------------------------------------------------- Percentage of Revenues For Year Ended December 31, Pro Forma 1995 1994 1993 - -------------------------------------------------------------------------------- Revenues 100.0 100.0 100.0 Cost of Sales 63.5 66.5 66.0 - -------------------------------------------------------------------------------- Gross Margin 36.5 33.5 34.0 Selling, General and Administrative 20.8 34.3 15.0 - -------------------------------------------------------------------------------- Operating Income (Loss) 15.7 (0.8) 19.0 Interest Income (Expense) .8 .2 (.1) Net Gain on Securities Sale .9 - -------------------------------------------------------------------------------- Income before Income Taxes 16.5 .3 18.9 - -------------------------------------------------------------------------------- Net Income 10.0 .1 11.7 - --------------------------------------------------------------------------------
1995 Compared to 1994 RESULTS OF OPERATIONS--The Company reported net income of $6.8 million, or $1.08 per share, in 1995, an increase of $6.7 million compared to $.05 million or $.0l per share, in 1994. Weighted average shares outstanding increased 3% compared to 1994. Net income in 1995 improved as a result of improved program productivity, continued focus on cost control and internal process improvements. The significant improvement in 1995 net income was also impacted by the absence of a substantial allowance for bad debts such as the $5.9 million charge recorded in the fourth quarter of 1994. In 1995 the Company reversed $0.6 million of the reserve for doubtful accounts established in the fourth quarter of 1994. REVENUES--Revenues were $67.2 million in 1995, a 28% increase from $52.5 million in 1994. Revenues increased primarily due to improved program performance and the addition/inclusion of Interlink revenues for the period August 1 through December 31, 1995 of $3.8 million. (See Note 2 to Consolidated Financial Statements.) As a percentage of total revenues, fixed fee and non-incentive based revenues were 74% compared to 71% in 1994. European revenues were $27.1 million, a 20% increase from $22.7 million in 1994. The following clients contributed in excess of 10% of consolidated revenues during one of the prior three years: Siemens A.G. in 1995 and 1994; and Revlon Consumer Products Corporation, Dover Corporation, and Siemens A.G. in 1993. (See Note 10 to Consolidated Financial Statements.) COST OF SALES--Cost of Sales (COS) includes all costs associated directly with the generation of revenue. Such costs include certain personnel and facilities costs, program-related travel and entertainment, hardware costs, and incentive compensation expense. COS was $42.7 million in 1995, a 22% increase compared to $34.9 million in 1994. COS as a percentage of revenues decreased 3 percentage points from 66.5% in 1994 to 63.5% in 1995. The Company continued to experience increases in both new and continuing contract activity. In response to the heightened demand and increased level of business, particularly in Europe, the Company hired additional 3 4 Resultants. As a result of the additional Resultants, the addition of Interlink personnel, the change in the mix of U.S. and European employees, and annual salary adjustments, the compensation component of COS increased 14% in 1995 compared to 1994. Additionally, the costs related to mid-1994 expansions of the Dallas and Frankfurt offices are reflected for a full year in 1995. The Company does not anticipate the need to significantly expand offices in the near term; however, the Company will continue to hire Resultants as the need to staff new programs arises. COS also includes $1.8 million of Interlink hardware purchases which were not present in 1994, and incentive compensation. Incentive compensation is based on Company financial performance, and was $3.2 million in 1995 compared to $1.1 million in 1994. In accordance with Mr. Thomas' employment agreement, which provides for no base salary, Mr. Thomas earned $1.9 million in incentive compensation in 1995 and earned no incentive compensation in 1994. GROSS MARGIN--Gross margin was $24.6 million, representing 37% of revenues in 1995 compared to $17.6 million and 34% of revenues in 1994. Gross margin improvements were due to increases in revenues and increased efficiency in the use of Company resources. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES--Selling, general and administrative expenses (SG&A) consists of all operating expenses not directly associated with the generation of revenue. A majority of SG&A expenses were for corporate personnel (including certain officers), non-program-related travel and entertainment, corporate facilities costs, and professional and legal costs. SG&A was $14.0 million in 1995, a 22% decrease compared to $18.0 million in 1994. Excluding the effects of the $5.9 million charge for doubtful accounts in 1994, SG&A costs increased at a rate consistent with the growth rate of revenue. The Company also reversed $0.6 million of the 1994 reserve established for doubtful accounts. The $3.0 million absolute increase is due to the fully realized effects of various expansion efforts undertaken in 1994. The expansion efforts included the addition of corporate staff as well as an increase in sales and marketing employees. As a result, the compensation component of SG&A increased significantly from 1994 to 1995. Sales and marketing efforts have increased non-program-related travel by $0.5 million. Corporate facilities-related costs such as rent, depreciation and utilities increased to $2.4 million in 1995 from $1.7 million in 1994. The Company believes that the step-wise increase of SG&A costs associated with operating as a public company was fully absorbed in 1994 and 1995. SG&A costs should stabilize as a percentage of revenues. OTHER--The Company's effective tax rate was 39% in 1995, a decrease from 68% in 1994. The rate in 1994 was unusually high due to low domestic taxable income and certain non-deductible expenses. 1994 COMPARED TO PRO FORMA 1993 RESULTS OF OPERATIONS--Net income in 1994 was $.05 million or $.0l per share. Results in 1994 reflect a charge of $5.9 million to establish reserves for doubtful receivables on completed contracts. The Company's 1994 results were also adversely affected by low revenue realization on a few key performance- oriented contracts and by the cost of staffing and operating a sales organization, new hires and office expansion necessitated by increased business activity. REVENUES--Revenues were $52.5 million in 1994, an 18% increase from $44.6 million in 1993. Revenues increased primarily due to additional European programs resulting from referrals and other new business stemming from customer satisfaction on existing programs. Fixed fee revenues were $37.3 million in 1994, a 74% increase compared to $21.4 million in 1993. As a percentage of total revenues, fixed fee revenues were 71% compared to 48% in 1993. Fixed fees increased on both an absolute and relative basis as a result of growth in the Company's business, particularly in Europe, where the Company has historically worked more on a fixed fee basis. European revenues were $22.7 million, an 111% increase compared to $10.7 million in 1993. Due to low revenue realization on a number of domestic performance-oriented programs, domestic revenues decreased 12%. (See geographic results in Note 10 of the Consolidated Financial Statements for additional information.) COST OF SALES--COS was $34.9 million in 1994, a 19% increase compared to $29.4 million in 1993. During 1994 the level of program activity significantly increased. In response to the heightened demand, the Company hired additional Resultants and expanded regional office facilities, including related administrative personnel. 4 5 For 1994, the Company employed an average of 171 Resultants and, at year end, 174 Resultants. This compares to an average of 146 Resultants in 1993 and 158 Resultants at year end 1993. Program related travel increased proportionately with the additional Resultants. During 1994, the Company relocated its Frankfurt office and enlarged its Dallas office, expanded accommodations at the CEO Center and opened a new office in Zurich, Switzerland. Consequently, facilities-related costs increased from $2.1 million in 1993 to $3.0 million in 1994. Incentive compensation in 1994 was $1.1 million compared to $2.8 million in 1993. In accordance with Mr. Thomas' employment agreement, he did not earn salary or incentive compensation in 1994. GROSS MARGIN--Gross margin was $17.6 million and 34% of revenue in 1994 compared to $15.1 million and 34% of revenue in 1993. Although certain components of COS increased significantly in 1994, the increased incentive compensation paid in 1993 served to keep gross margin percentages stable from 1993 to 1994. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE--SG&A was $18.0 million in 1994, a 170% increase from $6.7 million in 1993. SG&A in 1994 included a charge of $5.9 million to establish reserves for doubtful receivables on completed contracts. First, pursuant to the February 15, 1995 settlement of a 1993 lawsuit with Revlon Consumer Products Corporation ("Revlon"), the Company recorded a charge of $3.2 million in the fourth quarter of 1994, as part of a confidential settlement agreement. Prior to this settlement, the Company and its legal counsel were confident that, had the matter proceeded to trial, the Company would have prevailed. Consequently, the Company made no provision for reserves prior to the settlement date. Due to the significant amount of time and resources being consumed by the litigation, the Company concluded the settlement was in the best interests of the Company. Second, by mutual agreement, the Company and a client terminated a significant contract. The client was experiencing liquidity difficulties and a $1.5 million reserve was established against the outstanding receivable balance of $2.1 million. Third, in 1993 the Company offered terms on a program which permitted a client to defer payment until December 31, 1994. The client refused to pay the outstanding receivable, alleging that a certain performance target was not met. The Company established a bad debt reserve in the amount of the entire $0.7 million receivable. Fourth, the Company was involved in a dispute with a client regarding $0.6 million in fees invoiced prior to 1994. This matter was resolved in December 1994, resulting in a charge of $0.4 million against a reserve previously established and a charge of approximately $0.3 million in the fourth quarter of 1994. The balance of the $5.9 million charge, $0.2 million, was established to provide for the settlement of disputes with another client. Excluding the 1994 charge for doubtful receivables, the additional increase in SG&A was precipitated by increased business activity and the administrative costs associated with an increased employee base as well as an initiative to expand the business through focused sales and marketing strategies. Prior to 1994, the Company did not have a distinct sales and marketing or human resource organization. Additional administrative departments such as legal and investor relations were required as a result of the Company's growth. The addition of these departments increased SG&A labor, benefits and travel by $2.9 million in 1994. SG&A also rose by approximately $2.0 million due to the additional expenses associated with expansion of the Corporate headquarters offices and due to the increased administrative expenses (such as computer maintenance, supplies and postage) associated with an increase in the total number of employees. OTHER--In 1994, the Company exercised a total of 300,000 warrants to purchase the common stock of a client. Simultaneously with the exercise of the warrants, the Company sold the common stock in the open market. The Company realized a net gain of $0.5 million on the sale of the common stock. At December 31, 1994, the Company had exercised all warrants. The Company's effective tax rate was 68% in 1994, an increase from 39% in 1993, due to the change in the mix of domestic and European profitability and certain non-deductible expenses. QUARTERLY RESULTS--The following table sets forth certain unaudited operating results for each of the four quarters in the two years ended December 31, 1995. The information has been prepared on the same basis as the audited financial statements and, in the opinion of the Company, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. 5 6
- ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) 1995 1994 For the three months ended For the three months ended Mar. 31, June 30, Sept. 30, Dec. 31, YTD Mar. 31, June 30, Sept. 30, Dec. 31, YTD - ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 15,514 $16,320 $16,371 $19,015 $ 67,220 $11,856 $ 13,931 $12,202 $14,471 $52,460 Operating Income (Loss) 1,965 2,984 2,495 3,135 10,579 1,634 2,268 83 (4,424) (439) Income (Loss) before Income Taxes 2,020 3,133 2,615 3,335 11,103 1,675 2,749 121 (4,400) 145 Net Income (Loss) 1,212 1,880 1,590 2,073 6,755 1,005 1,649 68 (2,676) 46 Earnings (Loss) per share $0.20 $0.30 $0.25 $0.33 $ 1.08 $0.16 $0.27 $0.01 $(.43) $0.01 Weighted average shares and share equivalents 6,027 6,265 6,365 6,284 6,258 6,213 6,107 6,024 6,167 6,103 - ------------------------------------------------------------------------------------------------------------------------------------ STOCK PRICE (1) High $10.50 $11.00 $16.00 $15.87 $15.87 $18.75 $16.25 $13.75 $9.25 $18.75 Low $6.25 $9.50 $10.50 $11.75 $6.25 $15.50 $9.75 $8.75 $5.00 $5.00 Close $10.37 $10.50 $14.50 $13.50 $13.50 $16.12 $11.00 $8.75 $6.25 $6.25
(1) The stock prices set forth represent the highest and lowest sales prices per share of the Company's Common Stock as reported by the NASDAQ Stock Market. The prices reported by the NASDAQ Stock Market reflect inter-dealer prices without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. QUARTER ENDED DECEMBER 31, 1995--A description of adjustments material to fourth quarter results follows. In the fourth quarter of 1994 a reserve of $1.5 million was established against a $2.1 million receivable from a client experiencing liquidity difficulties. According to an agreed repayment plan, the client has been paying the Company $22,000 per week, and through March 1, 1996, the client had made all payments. In consideration of the consistent payments received since the agreed repayment plan, the Company reduced the reserve against the remaining client receivable by $0.6 million to $0.4 million in the fourth quarter of 1995. LIQUIDITY AND CAPITAL RESOURCES--Cash and cash equivalents increased by $7.3 million in 1995 compared to a $6.8 million decrease in 1994 and a $9.9 million increase in 1993. The major components of these changes are discussed below. CASH FLOWS FROM OPERATING ACTIVITIES--Net cash flows provided by operating activities increased to $10.5 million from cash flows used in operating activities of $4.5 million in 1994 and $1.6 million in 1993. Such fluctuations are a direct result of fluctuations in profitability in these years. Cash flows provided by operating activities in 1995 and combined with cash provided by financing activities in 1994 and 1993 were used to fund capital additions and acquisitions during 1995, 1994 and 1993. Accounts receivable balances more than 30 days past due at year end were $1.4 million, compared to $0.7 million at December 31, 1994 and $2.0 million at December 31, 1993. Days sales outstanding has also steadily improved from 100 days at the end of 1993 to 81 days at December 31, 1994 and 79 days at December 31, 1995. CASH FLOWS FROM INVESTING ACTIVITIES--Cash used for capital additions and business acquisitions comprise most of the Company's investing activities. Net capital expenditures were comprised primarily of CEO Center expansion in 1995, corporate headquarters and CEO Center expansion as well as the move of the Frankfurt office and the expansion of the Dallas office in 1994, and CEO Center expansion in 1993. In 1995, the Company used $1.5 million cash to acquire Interlink Technologies, Inc. In 1994, cash provided by investing activities was positively impacted by a net $2.6 million associated with the previously mentioned securities sale in which warrants were exercised for stock and the stock simultaneously sold for cash. CASH FLOWS FROM FINANCING ACTIVITIES--Cash flows from financing activities during 1995 and 1994 resulted from stock option exercises and certain borrowings and repayments from affiliates. Cash flows from financing activities in 1993 were primarily the results of the issuance of common stock associated with the initial public offering and the related debt repayment with such proceeds. Aside from capital lease obligations of $0.2 million, the Company has no outstanding long-term indebtedness. The Company's $6.0 million line of credit agreement, including $1.0 million for letters of credit, with Comerica Bank has been extended to February 1998. Loans under this agreement bear interest at the prime 6 7 rate--a reduction from prime plus 1/4% in the prior agreement. The bank has also removed the need for any collateral, making the new arrangement unsecured. The credit agreement provides, among other things, that the Company may pay dividends of up to 50% of its net income. Management does not anticipate paying such dividends. During 1995, the Company did not incur any borrowings under this line of credit. In 1994, the Board of Directors approved a stock repurchase plan for up to 250,000 shares. The Company may purchase stock in the open market in the future under this program. The Company purchased 7,000 shares in 1994, no shares in 1995, and 24,500 shares through March 8, 1996 under this plan. FINANCIAL CONDITION--The Company believes that its financial condition remains strong and that it has the financial resources necessary to meet its needs. The Company does, however, believe its excess cash balance will gradually decline over the next few months as expansion of the business will require capital resources. Additionally, the Company will begin to make significant foreign and domestic estimated tax payments in 1996 and the Company has activated its stock buyback program. Cash provided by operating activities and the Company's credit facility should be sufficient to meet short and long term operational needs and expansion plans. RECENT ACCOUNTING STANDARDS--In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). SFAS No. 121 requires, among other things, impairment loss on assets to be held and gains or losses from assets that are expected to be disposed of, be included as a component of income from continuing operations. The Company will adopt SFAS No. 121 in fiscal 1996 and its implementation is not expected to have a material effect on the consolidated financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the fair value method in place of the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. The Company does not anticipate adopting the fair value method encouraged by SFAS No. 123 and will continue to account for such transactions in accordance with APB No. 25. 7 8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Balance Sheets - --------------------------------------------------------------------------- December 31, (in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------ 1995 1994 ASSETS Current Assets Cash and cash equivalents $ 11,273 $ 3,942 Trade accounts receivable, net of allowances of $245 and $890 14,476 11,583 Accounts and notes receivable--affiliates -- 1,247 Other assets, net of allowance of $382 in 1995 2,257 2,737 - ------------------------------------------------------------------------------------------------------------ Total Current Assets 28,006 19,509 Net Property and Equipment 6,547 6,217 Capitalized Software Development Costs 832 -- Other Assets, net of allowance of $1,500 in 1994 4,772 1,841 - ------------------------------------------------------------------------------------------------------------ Total Assets $ 40,157 $ 27,567 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 4,229 $ 3,083 Accounts payable--affiliates 1,027 -- Income taxes payable 2,428 -- Advance payments 294 1,076 Current maturities of long-term obligations 27 102 - ------------------------------------------------------------------------------------------------------------ Total Current Liabilities 8,005 4,261 Deferred Taxes Payable -- 92 Long-Term Obligations 1,101 937 - ------------------------------------------------------------------------------------------------------------ Total Liabilities 9,106 5,290 - ------------------------------------------------------------------------------------------------------------ Commitments and Contingencies Stockholders' Equity Common Stock, $.01 par value; 12,500,000 shares authorized, 5,983,903 and 5,802,959 shares issued 60 58 Class B Common Stock, $.01 par value; 1,200,000 shares authorized, 152,133 and 106,658 shares issued and outstanding 2 1 Additional paid-in capital 18,094 16,349 Retained earnings 13,745 6,990 Cumulative translation adjustment 283 -- Treasury stock, 90,603 and 89,868 shares, at cost (1,133) (1,121) - ------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 31,051 22,277 - ------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $ 40,157 $ 27,567 ==================================
See accompanying notes to consolidated financial statements. 8 9 Consolidated Statements of Operations - -------------------------------------------------------------------------------- Year Ended December 31, (in thousands, except share data)
Pro Forma Unaudited 1995 1994 1993 1993 Revenues $67,220 $52,460 $ 44,586 $44,586 Cost of Sales 42,651 34,901 29,277 29,440 - ------------------------------------------------------------------------------------------------------------ Gross Margin 24,569 17,559 15,309 15,146 Selling, General and Administrative 13,990 17,998 6,899 6,665 Management Fees and Royalty -- -- 1,459 -- - ------------------------------------------------------------------------------------------------------------ Operating Income (Loss) 10,579 (439) 6,951 8,481 Interest income (expense), including income of $533, $168 and $125 524 105 (77) (30) Net gain on securities sale -- 479 -- -- - ------------------------------------------------------------------------------------------------------------ Income before Income Taxes 11,103 145 6,874 8,451 Income Taxes 4,348 99 2,644 3,254 - ------------------------------------------------------------------------------------------------------------ Net Income $6,755 $46 $4,230 $5,197 ======================================================= Earnings per common and common equivalent share $1.08 $0.01 $0.81 $1.00 Weighted average shares and share equivalents 6,258,040 6,102,911 5,222,843 5,222,843
See accompanying notes to consolidated financial statements. 9 10 Consolidated Statements of Stockholders' Equity - -------------------------------------------------------------------------------- (in thousands, except share data)
Class B Additional Common Common Paid-In Retained Translation Treasury Stock Stock Capital Earnings Adjustment Stock Total December 31, 1992 $45 $-- $430 $ 3,122 $-- $(5,098) (1,501) Dividends declared--Class A -- -- -- (408) -- -- (408) Issuance of 85,342 shares of Common Stock and 95,124 shares of Class B 1 1 445 -- -- -- 447 Tax benefit of non-qualified stock option exercises -- -- 309 -- -- -- 309 Sale of 8,100 shares of Treasury Stock -- -- 14 -- -- 35 49 Redemption of 42,548 shares of Class B -- -- (319) -- -- -- (319) Conversion of 937,500 shares of Redeemable Class A to Common Stock 9 -- 4,991 -- -- (5,000) -- Retirement of 1,187,700 shares of Common Stock and 937,500 shares of Redeemable Class A (12) -- (5,051) -- -- 10,063 5,000 Receipt of 82,868 shares of Common Stock from Mr. Thomas for Treasury -- -- -- -- -- (1,046) (1,046) Issuance of 1,372,500 shares of Common Stock in initial public offering 14 -- 14,887 -- -- -- 14,901 Net income -- -- -- 4,230 -- -- 4,230 - ------------------------------------------------------------------------------------------------------------------------- December 31, 1993 57 1 15,706 6,944 -- (1,046) 21,662 Issuance of 54,716 and 109,104 shares of Common Stock and of Class B 1 1 599 -- -- -- 601 Tax benefit of non-qualified stock option exercises -- -- 373 -- -- -- 373 Redemption of 73,472 shares of Class B -- (1) (329) -- -- -- (330) Purchase of 7,000 shares of Common Stock for Treasury -- -- -- -- -- (75) (75) Net income -- -- -- 46 -- -- 46 - ------------------------------------------------------------------------------------------------------------------------- December 31, 1994 58 1 16,349 6,990 -- (1,121) 22,277 Issuance of 180,944 and 223,790 shares of Common Stock and of Class B 2 3 2,308 -- -- -- 2,313 Tax benefit of non-qualified stock option exercises -- -- 575 -- -- -- 575 Redemption of 186,755 shares of Class B -- (2) (1,843) -- -- -- (1,845) Performance guarantee by Mr. Thomas -- -- 705 -- -- -- 705 Purchase of 735 shares of Common Stock for Treasury -- -- -- -- -- (12) (12) Foreign currency translation adjustment -- -- -- -- 283 -- 283 Net income -- -- -- 6,755 -- -- 6,755 - ------------------------------------------------------------------------------------------------------------------------- December 31, 1995 $60 $2 $ 18,094 $ 13,745 $283 $(1,133) $31,051 ===================================================================================
See accompanying notes to consolidated financial statements. 10 11 Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- Year Ended December 31, (in thousands)
- ------------------------------------------------------------------------------------------------------------ 1995 1994 1993 Cash Flows From Operating Activities Net income $6,755 $46 $4,230 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 2,038 1,229 996 Net gain on securities sale -- (479) -- Revenue earned in warrants -- (663) (1,459) Allowance for doubtful accounts 245 (400) 150 Provision for performance guarantees -- (60) (906) Provision for expatriate costs (311) (417) (919) (Gain) Loss on disposal of property -- 167 (14) Deferred taxes 621 (1,657) 1,140 Change in operating assets and liabilities (Increase)/Decrease trade accounts receivable (2,143) 533 (4,350) (Increase)/Decrease other assets (496) (192) (718) Increase/(Decrease) accounts payable and accrued liabilities 1,528 922 285 Increase/(Decrease) advance payments (812) (2,392) (283) Increase/(Decrease) income taxes payable 3,032 (1,104) 244 - ------------------------------------------------------------------------------------------------------------ Net Cash Provided By (Used In) Operating Activities 10,457 (4,467) (1,604) - ------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Acquisition of Interlink Technologies (1,500) -- -- Increase in short-term receivable (572) -- -- Capital expenditures (1,714) (3,805) (1,247) Exercise of warrants to acquire securities -- (2,625) -- Proceeds from securities sale -- 5,226 -- Capitalization of software development costs (83) -- -- Other (230) 130 - ------------------------------------------------------------------------------------------------------------ Net Cash Used In Investing Activities (4,099) (1,204) (1,117) - ------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Net proceeds from initial public offering -- -- 14,901 Dividends paid to EDS -- -- (680) Purchase of treasury stock (12) (75) (74) Proceeds from sale of treasury stock -- -- 49 Proceeds from exercise of stock options 495 229 184 Repayment of other long-term obligations (70) (219) (105) Proceeds from short-term debt -- -- 2,850 Repayment of short-term debt -- -- (4,482) Repayment from (advances to) affiliates 592 (1,085) (11) - ------------------------------------------------------------------------------------------------------------ Net Cash Provided By (Used In) Financing Activities 1,005 (1,150) 12,632 Effect of Exchange Rate Changes on Cash (32) -- -- - ------------------------------------------------------------------------------------------------------------ Net Increase /(Decrease) In Cash and Cash Equivalents 7,331 (6,821) 9,911 Cash and Cash Equivalents Beginning of period 3,942 10,763 852 - ------------------------------------------------------------------------------------------------------------ End of period $ 11,273 $ 3,942 $ 10,763 ==================================================
11 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) THE COMPANY -- Thomas Group, Inc. (the "Company" or "TGI") was incorporated under the laws of the State of Delaware in June 1978 and provides management services designed to improve the competitiveness and profitability of the Company's clients. The Company's specific methodology, known as Total Cycle Time, focuses on reducing the time spent on revenue-producing, product development and administrative processes, resulting in improvements in financial performance, quality and response time. (b) BASIS OF PRESENTATION -- The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Earnings per share is computed by dividing net income by the weighted average shares and share equivalents outstanding during the year. Fully diluted earnings per share and share equivalents are not presented because the result is not materially different. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) INITIAL PUBLIC OFFERING -- On August 19, 1993, the Company completed an initial public offering of 1,750,000 shares of its Common Stock at $12.625 per share. Of the 1,750,000 shares, the Company sold 1,200,000 shares, and selling stockholders sold the balance of 550,000 shares. The Company sold an additional 172,500 shares in September 1993 when the underwriters exercised their over-allotment option. Net proceeds to the Company from the sale of 1,372,500 shares of Common Stock were $14.9 million. At the time of the initial public offering, the Company acquired TC Operating, Inc. ("TCO") from Mr. Philip R. Thomas ("Mr. Thomas"), Chairman of the Board, Chief Executive Officer, and a principal stockholder of the Company, for 712,871 shares of Common Stock. The acquisition was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. The financial statements have been retroactively adjusted to reflect the acquisition of TCO, and the shares of Common Stock issued in connection with the acquisition have been treated as outstanding for all periods presented. A number of changes took place on or prior to the closing of the initial public offering, including (i) termination of the Company's obligation to make payments to Electronic Data Systems Corporation ("EDS"), either in the form of interest, dividends or marketing fees, (ii) termination of the management agreement with Thomas Group Holding Company ("TGHC"), (iii) commencement of an employment agreement with Mr. Thomas, and (iv) termination of royalty payments to TCO. Due to these changes, historical results of operations are not comparable and may not provide the most meaningful information. Pro forma information has therefore been provided for 1993, and for consistency the comparison of results of operations for 1993 is based upon such pro forma information. STOCK SPLIT -- Immediately preceding the initial public offering, the Board of Directors and stockholders approved a 3- for-1 split of each outstanding share of Common Stock, Redeemable Class A Common Stock and Class B Common Stock. All options for the purchase of Common Stock and Class B Common Stock have been adjusted for the 3-for-1 stock split. All references in the accompanying financial statements to the number of shares of Common Stock, Redeemable Class A Common Stock, Class B Common Stock, stock options, and per share amounts have been restated to reflect the stock split. WARRANTS -- The Company sold Warrants to purchase up to 175,000 shares of Common Stock at a price of $.001 per Warrant to the representatives of the Underwriters of the initial public offering. The Warrants are 12 13 exercisable for a period of five years beginning on August 26, 1993 at an initial per share exercise price of $15.15, which represents 120% of the initial offering price. (d) RECLASSIFICATIONS -- Beginning in the third quarter of 1995, the Company revised its income statement presentation to accommodate the expansion of business operations effective with an acquisition (See Note 2) and to more closely align the reporting of results with companies in the services industry. Previously reported Professional and Support Compensation and General, Administrative and Other expenses have been replaced by Cost of Sales and Selling, General and Administrative. Cost of Sales includes all costs associated directly with the generation of revenue. Selling, General and Administrative includes all other costs. The financial information for all periods presented has been reclassified to reflect this revision in presentation. Under the previous presentation, Professional and Support Compensation represented the Company's total personnel expense, excluding employee insurance costs, and General, Administrative and Other represented all operating expenses except personnel cost. Certain balance sheet amounts have been reclassified from the previously reported financial statements in order to conform with the current presentation. (e) PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided by accelerated methods over the estimated useful lives of the various assets for financial reporting purposes as follows: Furniture and fixtures 5-7 Years Equipment 3-7 Years Leasehold improvements 5-19 Years (f) CAPITALIZED SOFTWARE DEVELOPMENT COSTS -- Capitalization of software development costs begins upon the establishment of technological feasibility. Amortization is provided on a straight-line basis over the estimated useful life of the software product, generally three years. (g) INTANGIBLES -- The Company amortizes costs in excess of net assets acquired on a straight-line basis over the estimated benefit period, generally five years. Patents and licenses are generally amortized on a straight-line basis over five years. (h) REVENUES -- The Company derives its revenues from professional service agreements specifying fixed fees, or fixed fees plus incentives based on improvements achieved. Incentive (performance-oriented) revenues are based on agreed-upon formulas relating to improvements in customer-specific measures. Improvements are measured, and performance- oriented fees are billed, as earned, at time intervals specified in each contract, generally monthly. Fixed fees are recognized as revenue when earned, generally on a straight line basis over the life of the contract, when billed. An allowance for doubtful accounts is provided when necessary and is determined on a client by client basis. (i) ADVANCE PAYMENTS -- The Company occasionally receives advance payments of a portion of its fees. Advance payments are deferred upon receipt and credited against future revenue earned as specified by the contract. (j) DEFERRED COMPENSATION -- In 1994, the Company established a non-qualified deferred compensation program. Participation is limited to officers and key employees. The plan is funded by the participants who select investment vehicles from the same pool provided in the Company's 401(k) Plan. Assets of the plan were $0.7 million and accrued liabilities were $0.7 million at December 31, 1995. (k) INCOME TAXES -- Deferred income taxes are provided for temporary differences between the financial statement and income tax basis of assets and liabilities in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which the Company adopted retroactively to the beginning of 1992. Provisions are made for estimated United States and foreign income taxes, less available tax credits and 13 14 deductions, which may be incurred on the remittance of the Company's share of foreign subsidiaries' undistributed earnings. (l) CASH AND CASH EQUIVALENTS -- Cash equivalents consist of highly liquid investments with maturities of three months or less. At December 31, 1995, the Company had approximately $6.1 million invested in tax-exempt funds and certificates of deposit. (m) CONCENTRATION OF CREDIT RISK -- The Company provides its services primarily to a diverse group of large, well- established companies and does not require collateral on receivable balances. (n) FOREIGN CURRENCY TRANSLATION -- Beginning in 1995, all balance sheet accounts of foreign subsidiaries are translated at the current exchange rate as of the end of the accounting period. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Prior to 1995, these translation gains and losses were included in income and were not significant. Income statement items are translated at average currency exchange rates. (o) RECENT ACCOUNTING STANDARDS -- In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121 requires, among other things, that impairment loss on assets to be held, and gains or losses from assets that are expected to be disposed of, be included as a component of income from continuing operations. The Company will adopt SFAS No. 121 in fiscal 1996, and its implementation is not expected to have a material effect on the consolidated financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the fair value method in place of the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. The Company does not anticipate adopting the fair value method encouraged by SFAS No. 123 and will continue to account for such transactions in accordance with APB No. 25. 2 -- ACQUISITION In August 1995, the Company acquired substantially all of the assets of Interlink Technologies, Inc. ("Interlink"), a provider of paperless warehouse and distribution systems, for approximately $1.5 million in cash. The acquisition was funded with cash from operations and accounted for under the purchase method of accounting. Interlink's results of operations have been included in the Company's consolidated financial statements beginning August 1, 1995. The Company's consolidated results of operations for the years ended December 31, on an unaudited pro forma basis, assuming the acquisition of Interlink had occurred as of January 1, 1994, are as follows:
- -------------------------------------------------------------------------------- (in thousands) 1995 1994 Revenues $ 71,119 $ 57,036 Net Income (Loss) 6,422 (84) Earnings (Loss) per common and common equivalent share $ 1.03 $ (.01)
In connection with the acquisition, the Company entered into a software development and consulting services agreement (the "Services Agreement") with the former principals of Interlink. The Services Agreement provides for the completion of information technology development projects currently in process, as well as ongoing services by the former principals. The Company is obligated for future payments under the Services Agreement based upon (i) completion of software currently under development, (ii) the provision of consulting and 14 15 other ongoing services, and (iii) the achievement of certain financial milestones. Contingent future payments are not expected to be material to the Company's results of operations or financial position. 3 -- OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 1994 Investment in joint venture $ 100 $ 162 Prepaid expenses 1,389 571 Cash surrender value of key-man life insurance 554 316 Deferred compensation plan assets 690 370 Receivable from employees for computers 208 262 Deferred tax benefit 554 1,116 Foreign tax receivable 495 -- Other intangibles, net 446 -- Income tax receivable -- 193 Investment in Texas Stadium Suite 578 -- Notes receivable 519 -- Long-term receivables 1,184 1,274 Other 312 314 - ------------------------------------------------------------------------------------------------------------ 7,029 4,578 Less current portion (2,257) (2,737) - ------------------------------------------------------------------------------------------------------------ $ 4,772 $ 1,841 =================================================
On December 31, 1995, the Company purchased a leasehold interest in a Texas Stadium suite for $0.6 million. (See also Note 11 to the Consolidated Financial Statements.) Amortization of the purchase price is provided on a straight-line basis over the remaining term of the lease, which expires on December 31, 2008. The Company had one program that provided for payment in stock warrants in lieu of cash. The warrants entitled the Company to acquire the client's common stock for $8.75 a share. During 1993 and the first quarter of 1994, the Company earned and was paid a total of 300,000 warrants. Upon receipt of such warrants the Company recognized revenue equal to the value of the warrants as computed under the Black-Scholes pricing model of $1.5 million and $0.7 million in 1994 and 1993, respectively. The valuation approximated the most objectively determinable fair value of the services provided by the Company. In 1994, the Company exercised all 300,000 warrants and purchased 300,000 shares of the client's common stock at $8.75 per share. Immediately thereafter, the Company sold the common stock in the open market and received net cash proceeds of $2.6 million. A net gain of $0.5 million was recognized on the sale of the common stock. At December 31, 1994, the Company had disposed of all warrants and common stock. 15 16 4 -- PROPERTY AND EQUIPMENT
- ------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 1994 Equipment $ 4,104 $ 2,921 Furniture and fixtures 2,255 1,954 Leasehold improvements 4,115 3,432 Equipment under capital leases 395 395 Construction in process 1,065 1,094 Automobiles 176 166 - ------------------------------------------------------------------------------------------------------------ 12,110 9,962 Less accumulated depreciation and amortization, including $372 and $350 respectively, relating to capital leases (5,563) (3,745) - ------------------------------------------------------------------------------------------------------------ $ 6,547 $ 6,217 =================================================
5 -- LONG-TERM OBLIGATIONS - ------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 1994 Capital lease obligations $ 69 $ 134 Deferred compensation plan 690 370 Other 369 535 - ------------------------------------------------------------------------------------------------------------ 1,128 1,039 Less current portion (27) (102) - ------------------------------------------------------------------------------------------------------------ $1,101 $ 937 ==============================================
Minimum lease payments required under capital leases and non- cancelable operating leases subsequent to December 31, 1995, are as follows:
- ------------------------------------------------------------------------------------------------------------ (in thousands) Capital Operating Leases Leases 1996 $70 $2,991 1997 -- 2,619 1998 -- 2,407 1999 -- 1,269 2000 -- 1,098 Thereafter 1,678 - ------------------------------------------------------------------------------------------------------------ 70 12,062 Less amount representing interest (1) -- - ------------------------------------------------------------------------------------------------------------ $69 $12,062 ===========================================
The Company leases office space, vehicles and various types of office equipment. Rent expense related to operating leases totaled $1.8 million for 1995, $2.7 million for 1994 (which includes a $0.3 million charge for lease abandonment), and $1.6 million for 1993. 16 17 6 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- ------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 1994 Accounts payable $1,693 $1,001 Accrued payroll and bonuses 643 313 Accrued employee benefits 597 156 Other accrued liabilities 1,145 1,151 Accrued expatriate costs 151 462 - ------------------------------------------------------------------------------------------------------------ $4,229 $3,083 ==============================================
7 -- INCOME TAXES Federal, state and foreign income taxes consist of the following:
- ------------------------------------------------------------------------------------------------------------ (in thousands) Year Ended December 31, 1995 1994 1993 Current tax expense Federal 1,861 $685 $770 State 219 81 199 Foreign 1,647 990 535 - ------------------------------------------------------------------------------------------------------------ 3,727 1,756 1,504 - ------------------------------------------------------------------------------------------------------------ Deferred tax expense (benefit) Federal 567 (1,483) 1,120 State 54 (174) 20 - ------------------------------------------------------------------------------------------------------------ 621 (1,657) 1,140 - ------------------------------------------------------------------------------------------------------------ $4,348 $99 $2,644 ==============================================
The following reconciles income tax expense at the federal statutory rate to the actual tax expense:
- ------------------------------------------------------------------------------------------------------------ (in thousands) Year Ended December 31, 1995 1994 1993 Income taxes at statutory rate $3,775 $50 $2,337 Effect on taxes resulting from: State taxes 273 (93) 219 Foreign taxes 264 39 535 Foreign tax credit -- -- (434) Other (primarily permanent differences) 36 103 (13) - ------------------------------------------------------------------------------------------------------------ $4,348 $99 $2,644 ==============================================
Significant components of the Company's net deferred tax assets (liabilities) for federal and state income taxes are as follows:
- ------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 1994 Fixed assets $195 $186 Allowance for doubtful accounts 212 838 Computer software 41 -- Research and development (87) -- Investment in affiliates (27) (50) Accrued expenses 97 -- Other, net 123 50 - ------------------------------------------------------------------------------------------------------------ $554 $1,024 ============================================
17 18 Management believes that current and future levels of taxable income will be sufficient to realize the benefits of the deferred tax assets. The domestic and foreign source components of income (loss) before taxes are as follows:
- --------------------------------------------------------------------------------------- (in thousands) Year Ended December 31, 1995 1994 1993 Domestic sources $6,726 $(2,021) $5,483 Foreign sources 4,377 2,166 1,391
8 -- EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) retirement plan. The Company, at its discretion, matches a portion of the participants' contribution. Participants are vested in the Company's matching contribution after five years of full-time service and may join the plan January 1 and July 1. Matching contribution expense for the Company was $0.3 million, $0, and $0.3 million for 1995, 1994 and 1993, respectively. The Company has an incentive compensation plan covering all full-time employees who are not officers. All Company officers were covered under this same plan through August 1993. In 1993, the Company established a separate incentive compensation program for all officers and entered into employment agreements containing certain incentive compensation formulas with Mr. Thomas and Mr. Alex W. Young, President and Chief Operating Officer. Mr. Thomas' employment agreement has been amended and now provides that, except for certain Company-provided benefits, all of his compensation will be incentive-based. The aggregate incentive compensation paid under these plans was $3.2 million, $1.1 million, and $2.6 million in 1995, 1994 and 1993, respectively. In accordance with Mr. Thomas' employment agreement, he did not earn incentive compensation in 1994. Consequently, Mr. Thomas executed a promissory note in the amount of $1.1 million due September 5, 1995 for advances made to him. The note carried an interest rate equal to the interest rate the Company would pay on its primary borrowing facility. This loan was repaid in full on September 5, 1995. For tax planning purposes, the Company prepaid estimated fourth quarter 1993 incentive compensation of $0.4 million to the officers. Management subsequently concluded that fourth quarter performance did not warrant payment of incentive compensation. This prepayment was in part recouped against incentive compensation earned by the officers in 1994. The Company self-insures its medical costs associated with injury and hospitalization to its employees and their dependents up to a limit of $50,000 per person per plan year. Insurance is purchased for claims in excess of the self-insurance limits. The Company had an accrual for outstanding claims of approximately $0.3 million to cover any loss incurred, including those not yet reported, through December 31, 1995. 9 -- LITIGATION On December 29, 1993, the Company filed suit against Revlon Consumer Products Corporation claiming the Company was entitled to incentive (or performance-oriented) fees totaling approximately $3.9 million. This litigation and all related litigation was settled, resulting in a charge to earnings of $3.2 million in the fourth quarter of 1994 and a receivable of $0.7 million, reflecting the present value of payments to be received over a five-year period beginning July 15, 1995. The first payment of $0.2 million was received in July 1995. 18 19 10 -- SEGMENT DATA AND SALES TO MAJOR CUSTOMERS The Company operates in one dominant industry segment, management services; however, with the acquisition of Interlink, the Company's operations were expanded to include software development and information technology services. The software development and information technology services segment results were not significant to the Company in 1995. The Company conducts its business primarily in two geographic areas, North America and Europe. Information regarding these two areas follows:
- ------------------------------------------------------------------------------------------------------------ (in thousands) North America Europe Total Year Ended December 31, 1995 Sales to Unaffiliated Clients $ 40,125 $ 27,095 $ 67,220 % of Total Sales 60% 40% 100% Geographic Segment Profit $ 5,724 $ 4,855 $ 10,579 Interest income (expense) 524 - ------------------------------------------------------------------------------------------------------------ Income before Income Taxes $ 11,103 ========== Identifiable Assets $ 20,399 $ 5,782 $ 26,181 Corporate Assets 13,976 - ------------------------------------------------------------------------------------------------------------ Total Assets $ 40,157 ========== Year Ended December 31, 1994 Sales to Unaffiliated Clients $ 29,792 $ 22,668 $ 52,460 % of Total Sales 57% 43% 100% Geographic Segment Profit $ (5,252)(1) $ 5,292 $ 40 Interest income (expense) 105 - ------------------------------------------------------------------------------------------------------------ Income before Income Taxes $ 145 ========== Identifiable Assets $ 10,213 $ 5,223 $ 15,436 Corporate Assets 12,131 - ------------------------------------------------------------------------------------------------------------ Total Assets $ 27,567 ========== Year Ended December 31, 1993 Sales to Unaffiliated Clients $ 33,848 $ 10,738 $ 44,586 % of Total Sales 76% 24% 100% Geographic Segment Profit $ 5,642 $ 1,309 $ 6,951 Interest income (expense) (77) - ------------------------------------------------------------------------------------------------------------ Income before Income Taxes $ 6,874 ========== Identifiable Assets $ 13,923 $ 2,663 $ 16,586 Corporate Assets 14,368 - ------------------------------------------------------------------------------------------------------------ Total Assets $ 30,954 ==========
(1) Includes charge of $5.9 million for allowance for doubtful accounts and net gain on securities sale of $0.5 million. 19 20 The following table indicates those clients whose revenues were in excess of 10% of consolidated revenues for the three years ended December 31, 1995.
- ------------------------------------------------------------------------------------------------------------ (in thousands) North America % of Total Europe % of Total Year Ended December 31, 1995 Client 1 $5,846 9% $6,250 9% Year Ended December 31, 1994 Client 1 $6,989 13% $11,264 22% Year Ended December 31, 1993 Client 1 $5,036 11% Client 2 4,486 10% Client 3 1,427 3% $6,342 14%
11 -- RELATED PARTY TRANSACTIONS PHILIP R. THOMAS-PRINCIPAL STOCKHOLDER -- On September 5, 1995, Mr. Thomas repaid a $1.1 million promissory note, together with accrued interest of $.05 million. The loan was repaid with $0.9 million in cash and 29,000 shares of Class B Common Stock owned by Mr. Thomas. The Class B Common Stock was valued at $10.15 per share (70% of the fair market value of the Company's Common Stock on the date of repayment). In accordance with his employment agreement, Mr. Thomas executed this note because he earned no incentive compensation in 1994 and had been advanced $1.1 million against 1994 incentive compensation. The Company has entered into a 25-year lease agreement with Mr. Thomas for 60 acres of land on which the CEO Center is situated. The Company has a separate agreement with Mr. Thomas to lease guest accommodations situated on Mr. Thomas' personal property adjacent to the CEO Center. The lease provides for monthly payments of $12,960 through November 30, 2016. The rental rate was determined by evaluating average occupancy rates and costs of comparable guest facilities in the area. On December 31, 1995, the Company prepaid its lease for guest accommodations at the CEO Center through November 2016. The $0.9 million prepayment accepted by Mr. Thomas represents a discount of $0.6 million (computed on a net present value basis) from the lease payments to which Mr. Thomas was entitled. The prepayment is included in Other Assets, and is being amortized on a straight-line basis over the term of the lease. On December 31, 1995, the Company agreed to purchase Mr. Thomas' leasehold interest in a Texas Stadium luxury suite for $0.6 million. The purchase price was established by an independent third party that facilitates similar transactions. In 1993, Mr. Thomas agreed to pay $0.7 million to a client of the Company in the event that (i) a performance target was not met by the client at the end of 1994 and (ii) the client was current on all outstanding balances due the Company at the end of 1994. The performance target was not met; however, Mr. Thomas did not pay the client because the client had an outstanding balance with the Company of $0.7 million. The Company recorded a reserve against this client receivable at December 31, 1994. The substance of Mr. Thomas' personal guarantee to the client was to ensure that the Company would receive payment of amounts due from the client. Late in 1995 when it became apparent that collection of amounts due from the client was unlikely, Mr. Thomas executed a promissory note to the Company in the amount of $0.7 million, due in April 1996. On December 31, 1995, Mr. Thomas prepaid this note, with accrued interest. The prepayment was recorded as a contribution to paid in capital. Mr. Thomas paid this note with the proceeds of the Company's prepayment of its lease for guest accommodations at the CEO Center. In the period December 1994 through February 1995, the Company issued duplicate stock certificates to Mr. Thomas in an aggregate amount of 1,130,000 shares. The duplicate certificates were issued in anticipation of an equal number of shares being returned by Mr. Thomas' personal lenders for cancellation. Certificates totaling 20 21 1,130,000 shares were returned and cancelled. The duplicate stock certificate issuance and subsequent cancellations had no economic effect upon the Company or Mr. Thomas' share ownership. In 1993, the Company entered into an agreement with Integrated Multimedia Solutions, Inc. ("IMS"), an affiliated entity, for the development of customized learning systems used in the application of Total Cycle Time methodology. Under this agreement, the Company paid IMS $0.4 million during 1993, of which $0.1 million was capitalized. In 1994, BERMAC Communications, Inc. ("BERMAC"), a computer software company, acquired IMS interest in this agreement and is currently pursuing completion of the project. In BERMAC's opinion, the IMS development platform had become technologically outdated and was not suitable for further expansion of the software. Based on this opinion, the capitalized $0.1 million was expensed in 1994. BERMAC is also currently developing a proprietary database of best practices for the Company in delivering Total Cycle Time programs. Under the initial eight month term of the agreement, the Company paid BERMAC approximately $0.6 million which was capitalized as software under development to be used internally by the Company. The database was substantially complete at the end of 1994, but is being upgraded to take advantage of the latest groupware and internet technologies. The Company paid and expensed $0.1 million of fees to BERMAC in 1995 for network support. Final on-site testing at client locations is scheduled for the second quarter of 1996. Pursuant to an agreement dated February 14, 1994 among BERMAC, TGHC (a company wholly owned by Mr. Thomas), Mr. Thomas, and other parties, Mr. Thomas granted to BERMAC a license to use proprietary computer-based training software, and agreed, through TGHC, to assist BERMAC in arranging private and public financing. TGHC also agreed to facilitate a strategic alliance between BERMAC and the Company. As part of the agreement, BERMAC agreed to reserve 15% of its common stock for issuance to Mr. Thomas or his designee. The factual circumstances under which Mr. Thomas could earn equity ownership in BERMAC, as contemplated by such agreement, have not come to pass within the time frame stipulated and consequently Mr. Thomas has neither earned nor has an opportunity to earn equity ownership in BERMAC. During 1994 the Company engaged Integrated Security Systems, Inc. ("ISSI"), to supply security equipment at various Company offices. Payments to ISSI for such equipment and services totaled $0.4 million in 1994. Mr. Thomas is the beneficial owner of 21.4% of ISSI's common stock. Effective February 16, 1994, ISSI entered into a five-year agreement with TGHC to provide the services of Gerald K. Beckmann, Director of TGI, as Chairman of the Board of ISSI for $0.1 million annually. Mr. Beckmann now serves as the elected Chairman of ISSI; consequently, the agreement with TGHC was terminated effective May 1995. As an additional marketing initiative, the Company employs two sales executives whose primary focus is acquiring new business through relationships in the investment banking community. The two sales executives have an ownership interest in Celerity Partners, a limited partnership (the "Partnership") which invests in companies whose competitiveness within a particular industry may be significantly improved. In addition, the general partner of the Partnership has been organized as a limited liability company, in which Mr. Thomas, Mr. Beckmann, and Mr. Jim Dykes (directors of the Company) own 40%, 15% and 1% equity interests, respectively. Mr. Beckmann also serves on the board of directors of the general partner. The Company's board of directors has precluded Mr. Thomas from becoming involved in contract negotiations or the contract approval process of any potential client in which the Partnership holds or is negotiating an ownership interest. The Company incurred costs of approximately $0.4 million in 1994 and $0.5 million in 1995 supporting this marketing initiative. OTHER AFFILIATES -- In 1994, TGI advanced Mr. Beckmann $0.1 million. Mr. Beckmann executed promissory notes due November 30, 1995. The notes carried an interest rate equal to the rate the Company would pay on its primary borrowing facility. The notes were repaid, with interest, on December 31, 1995. 21 22 A summary of current receivables from affiliates follows:
- ------------------------------------------------------------------------------------------------------------ (in thousands) December 31, 1995 1994 Philip R. Thomas Prepaid incentive compensation $ -- $1,094 Other Affiliates 153 - ------------------------------------------------------------------------------------------------------------ $ -- $1,247 ===============================================
A summary of transactions with affiliates follows:
- ------------------------------------------------------------------------------------------------------------ (in thousands) Year Ended December 31, 1995 1994 1993 Philip R. Thomas: Real estate and other rentals paid to Mr. Thomas $301 $332 $184 Payments to ISSI for security systems 94 350 -- Payments to BERMAC for custom computer software 139 592 -- Payments to IMS for custom computer software -- -- 427 Management fee and royalties paid to TGHC or TCO -- -- 1,459 Other Affiliates: Loans to Gerald K. Beckmann -- 102 --
ELECTRONIC DATA SYSTEMS CORPORATION ("EDS")--In February 1990, the Company sold EDS 937,500 shares of the Company's Redeemable Class A Common Stock for $5 million in cash and simultaneously purchased 937,500 shares of Common Stock from existing stockholders for $5 million. The Company also received a $2.5 million loan from EDS which became due and payable on August 19, 1993 and was retired with initial public offering proceeds. Prior to repayment of the EDS loan, the Company was required to dedicate, on a quarterly basis, 3% of net sales and 25% of net income for payment to EDS. The Company also entered into a Management Service Agreement with EDS which expired at the end of 1994 and which, in summary, compensated EDS for consulting services associated with information technology and the identification of marketing opportunities. Amounts paid to EDS are summarized as follows:
- ------------------------------------------------------------------------------------------------------------ (in thousands) Year Ended December 31, 1994 1993 Interest on loan $ -- $ 47 Principal repayments -- 1,332 Dividends declared on Redeemable Class A Common Stock -- 408 Marketing fee -- 100 Management services 60 65 - ------------------------------------------------------------------------------------------------------------ $ 60 $ 1,952 ===============================================
12 -- SELLING, GENERAL AND ADMINISTRATIVE Included in SG&A expenses in 1994 is a charge of $5.9 million to establish reserves for doubtful receivables on completed contracts. First, pursuant to the February 15, 1995 settlement of a 1993 lawsuit with 22 23 Revlon Consumer Products Corporation ("Revlon"), the Company recorded a charge of $3.2 million in the fourth quarter of 1994, as part of a confidential settlement agreement. Prior to this settlement, the Company and its legal counsel were confident that, had the matter proceeded to trial, the Company would have prevailed. Consequently, the Company made no provision for reserves prior to the settlement date. Due to the significant amount of time and resources being consumed by the litigation, the Company concluded the settlement was in the best interests of the Company. Second, by mutual agreement the Company and a client terminated a contract. The client was experiencing liquidity difficulties and a $1.5 million reserve was established against the outstanding receivable balance of $2.1 million. This client has remained current on their agreed-upon payment play to the Company and the reserve was adjusted to $0.4 million in the fourth quarter of 1995. Third, in 1993 the Company offered terms on a program which permitted a client to defer payment until December 31, 1994. The client refused to pay the outstanding receivable, alleging that a certain performance target was not met. The Company established a bad debt reserve in the amount of the entire $0.7 million receivable. Fourth, the Company was involved in a dispute with a client regarding $0.6 million in fees invoiced prior to 1994. This matter was resolved in December 1994, resulting in a charge of $0.4 million against a reserve previously established and a charge of approximately $0.3 million in the fourth quarter of 1994. The remaining $0.2 million reserve was recorded in the fourth quarter of 1994 to provide for the settlement of disputes with two other clients. 13 -- FINANCING AGREEMENT At December 31, 1995, the Company maintained a $6 million revolving credit agreement, including $1 million for letters of credit, with a bank. This agreement was to expire in January, 1996, and following a short-term extension has been further extended to February 1998. The credit agreement provides, among other things, that the Company may pay dividends of up to 50% of its net income. Interest on any base rate borrowing is payable at prime. The agreement is not collateralized. The Company did not borrow funds under the revolving line of credit agreements at any time during 1995. During 1995 and 1994 the Company paid no interest and paid a commitment fee of $23,000 and $20,000, respectively. 14 -- COMMON STOCK AND STOCK OPTIONS Shares of Common Stock and Class B Common Stock are identical, except that holders of Class B Common Stock have no voting rights. EDS was the holder of Redeemable Class A Common Stock prior to its conversion to Common Stock and retirement in connection with the initial public offering. The Company grants incentive and non-qualified stock options and has reserved 2,425,000 shares of Common Stock and 675,000 shares of Class B Common Stock for issuance. Options to purchase shares of the Company's Common Stock and Class B Common Stock have been granted to directors, officers and employees. The majority of the options granted become exercisable at the rate of 20% per year, and generally expire ten years after the date of grant. Of the 949,597 Common Stock options outstanding at December 31, 1995, 423,919 contain a provision whereby the option can be exercised by using shares of Class B Common Stock previously acquired through the exercise of Class B stock options and held for more than six months, to pay all or a portion of the option holder's exercise price. The tender of Class B Common Stock to pay for all or a portion of the exercise of Common Stock options is credited against the exercise price at the then fair market value of Class B Common Stock. The fair market value of Class B Stock is 70% of the then quoted closing price on the NASDAQ for the Company's Common Stock. 23 24 On December 1, 1994, the Company repriced certain outstanding common stock options to $6.75, the fair market value of the Company's common stock on that date. The table on the following page reflects the effect of the repricing. Information regarding exercisable options is as follows:
- ------------------------------------------------------------------------------------------------------------ December 31, 1995 1994 Common Stock options Exercisable 661,879 703,374 Average option price $ 10.17 $ 11.25 Class B Common Stock options Exercisable 200,397 401,775 Average option price $ 4.47 $ 2.77
Transactions relating to stock options are as follows:
-------------------------------------------------------------------------------------- Common Options shares Exercise Price Class B Options shares Exercise Price -------------------------------------------------------------------------------------- December 31, 1992 824,400 $0.40 - $12.625 664,020 $0.00 - $5.44 Granted 172,450 $0.00 - $18.75 -- -- Exercised (84,874) $0.00 - $14.25 (95,124) $0.00 - $5.44 Terminated (32,030) $0.40 - $14.25 (20,580) $1.33 - $5.33 --------- -------- December 31, 1993 879,946 $0.00 - $18.75 548,316 $0.00 - $5.44 Granted 604,424 $0.00 - $17.50 -- -- Exercised (48,000) $0.00 - $14.25 (109,104) $0.00 - $5.44 Terminated (431,684) $0.00 - $18.75 (1,620) $1.33 - $5.33 --------- -------- December 31, 1994 1,004,686 $0.00 - $12.625 437,592 $0.00 - $5.44 Granted 180,000 $0.00 - $15.50 -- -- Exercised (170,251) $0.00 - $13.00 (223,790) $0.00 - $5.44 Terminated (64,838) $0.00 - $16.75 (10,600) $0.00 - $5.33 --------- -------- December 31, 1995 949,597 $0.00 - $15.50 203,202 $0.00 - $5.44 ========= ========
24 25 15 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------------------------------------------------------------------ (in thousands, except share data) For the Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Interest paid $8 $62 $230 Income taxes paid 1,920 2,255 1,300 Transfer of 82,868 shares of Common Stock by Mr. Thomas in repayment of outstanding notes, accounts receivable and management fee buy-down -- -- 1,046 Receipt of Class B Common Stock in payment of exercise price of Common Stock options 1,845 330 245 Conversion of 937,500 shares of Redeemable Class A Common Stock to Common Stock -- -- 5,000 Acquisition of Texas Stadium Suite in exchange for note payable to Mr. Thomas 578 -- -- Prepayment of lease for CEO Center facilities in exchange for a note payable to Mr. Thomas 876 -- -- Repayment of loan by Mr. Thomas via offset with TGI prepayment of facilities lease 705 -- --
25 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Form 10-K/A No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, State of Texas, on September 30, 1996. THOMAS GROUP, INC. By: /s/ PHILIP R. THOMAS ----------------------------- Philip R. Thomas Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY Each individual whose signature appears below constitutes and appoints Philip R. Thomas and Alex W. Young, and each of them, such person's true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for such person and in such person's name, place, and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 26 27 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ PHILIP R. THOMAS Director, Chairman of the Board and Chief September 30, 1996 ------------------------ Executive Officer Philip R. Thomas /s/ ALEX W. YOUNG President, Chief Operating Officer and Director September 30, 1996 ------------------------ Alex W. Young /s/ LELAND L. GRUBB, JR. Vice President, Chief Financial Officer and September 30, 1996 ------------------------ Treasurer (Principal Financial and Accounting Leland L. Grubb, Jr. Officer) /s/ GERALD K. BECKMANN Director September 30, 1996 ------------------------ Gerald K. Beckmann /s/ JAMES P. BUCHANAN Director ------------------------ September 30, 1996 James P. Buchanan /s/ J. FRED BUCY Director September 30, 1996 ------------------------ J. Fred Bucy
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